SHLAES'S REBELLION

Amity Shlaes Makes the Case for Tax Reform

Jonathan R. Cohen

April 5, 1999 12:00 AM

Just in time for filing your taxes -- due, in case you've forgotten, on April 15 -- Amity Shlaes has produced The Greedy Hand. An analysis of our failed tax system, together with suggestions about how it might be reformed, the book has already leapt to the top of the bestseller list on Amazon.com -- proving that there's nothing like the task of preparing tax returns to convince people that something, somewhere, has gone wrong.

The "greedy hand" to which Shlaes refers is, of course, the government's. The phrase was coined by Tom Paine in his 1791 The Rights of Man to describe a state "thrusting itself into every corner and crevice of industry." Shlaes explains how the greedy hand has exploited in the United States the good will of the citizenry to create over the last hundred years our present tax code -- bent on confusing, frustrating, and intimidating us.

A member of the editorial board of the Wall Street Journal and the author of a book about postwar Germany, Shlaes is well positioned to examine the onerous and counterproductive taxes levied on Americans in every walk of life.

Each of her chapters shows how some aspect of our current tax policy destroys jobs, punishes marriage, and interferes with education, savings, retirement, and even dying. And in her brisk conclusion, she offers an eightpoint manifesto for comprehensive reform.

But perhaps the most important contribution in The Greedy Hand is the revelation of how the bloated tax-collecting apparatus is kept hidden from public view. The evil genius of the tax code lies in the withholding tax, the method of taking an ever-expanding chunk of money from our paychecks before we even can see it, let alone decide how it should be spent.

This wouldn't be necessarily a bad thing, Shlaes argues, if the money were put to good use -- like fighting World War II, the reason for launching the withholding tax in the first place. But taxes are used for social engineering as well. "Our tax code," she warns, "doesn't stop at merely taking its share. It also wants to tell people how to live."

Sometimes the result is intended, as in the 1998 tax legislation that sought to punish smokers and reward married couples. And sometimes the result is unintended, as in the tax rebate of the 1975 earned-income credit that ended up acting as a disincentive for low-income workers to strive for greater career success. But in every case, it is an intrusion of the greedy hand's taxing power into ever and ever larger segments of American life.

Shlaes traces the history of the withholding tax to a man named Beardsley Ruml, a pipe-smoking member of the Federal Reserve Board in 1942, who -- back when he had been treasurer of Macy's department store -- had noticed that shoppers preferred paying their bills in small portions. So, too, he argued, would they prefer paying taxes on the installment plan.

As those installments grow ever larger, the greedy hand sometimes overreaches, prompting taxpayers to pay attention to what's being taken from them. Sometimes they even rebel, as Californians did in 1978 when they unleashed Proposition 13 on unwary bureaucrats and politicians.

Shlaes approves of this tendency, of course, and would like to see more of it. But as she points out, tax reforms in America -- whether derived from a grass-roots revolt or from such major federal tax cuts as those during the Reagan administration -- are invariably undermined by new generations of politicians.

In fact, the government's addiction to taxes has proved unshakable by either Democrats or Republicans. It is on the latter that Shlaes pours special scorn, arguing that the Republicans "led the way in replacing the welfare state with the tax code as government's principal social engineering tool." The tax-slashing party of President Reagan, once it obtained control of Congress in 1994, found itself promoting merely "tiny, symbolic projects" (such as the family child credit proposed in the Contract With America) instead of wholesale tax reform.

Shlaes is obviously right that Republicans have helped maintain the burdensome and inequitable tax code. But we need to remember that for every fiscal sin of the Republicans, there are a thousand sins of the Democrats.

The Democratic party, especially its congressional wing, still keeps unswerving faith in the virtues of the Nanny State and in the efficacy of the tax system as a device for making us behave better.

It is in her analysis of the sins of the Nanny State that Shlaes really shines, especially when she turns her attention to such schemes as the attempt to equalize school funding.

Like most utopian projects that rely on big government to abolish social ills, equalization of school funding -- and its promise to rescue poor school districts -- begins as an attractive idea. But, put into practice through the tax code, the result is invariably disastrous.

In Vermont, for example, the recent attempt to equalize school funding created a system in which the portion of each town's property taxes assessed for education is collected by the state and then paid back to the towns in grants amounting to $ 5,000 per pupil. Wealthier school districts may not spend more than $ 5,000 per pupil without incurring tax penalties.

As Shlaes chronicles, the net effect has been to degrade, not improve, the quality of Vermont's public education -- for both the wealthy and the poor. Equalization punishes the wealthier schools by taking funds away from their enrichment programs, while at the same time raising expectations that can't be met for improving the curriculum of poorer ones.

The only achievement of the tax changes in Vermont has been the institutionalization of a low-grade but pernicious war between rich and poor, conducted by students, parents, and politicians.

There is a difficulty, as Shlaes notes, in getting Americans to focus on the tax code during an era of great prosperity. Indeed, Vermont's problems must seem very distant to many people, as the stock market flirts with the tenthousand mark.

One could, of course, make the argument that our prosperity would be even greater if taxes were not holding us back from even higher rates of growth. But voters don't seem particularly exercised by that argument at the moment.

And yet, even though, in the prosperity of 1999, Americans seem more or less resigned to the amount they pay in taxes, they would be in loud revolt if they understood the damage done by how their taxes are collected. In The Greedy Hand, Amity Shlaes has performed the service of discussing in concise and digestible bites the high cost of our tax system, how it got that way, and why we must do something about it. Her work may even be enough to get voters to think about the subject not just in April, as they sweat over their tax returns, but also in November, as they head to the voting booth.